US inflation data may confuse financial markets

Today we will get to know April inflation data in the US. If it turns out that the price dynamics in the US economy begins to decline, the dollar may begin to depreciate. In March this year. inflation in the United States increased to 8,5%, which was the highest reading in 40 years.

As the dollar climbed its 20-year high ...

The inflation record might have prompted Federal Reserve to act. The central bank's task is to ensure price stability, and should they increase, it should raise interest rates. The cycle of interest rate hikes in the US started in March and the announcements of further moves in this area may have influenced expectations regarding higher interest rates on the US currency and its appreciation to the levels observed recently 20 years ago.

The expectations for interest rate hikes could also lead to an increase in the yields on US treasury bonds (e.g. 10-year bonds to approx. 3%).

… At the same time stock markets suffered

Increase in bond yields, expectations for further monetary tightening, reduction of the Fed balance sheet - this information could in turn adversely affect the stock market. American index Nasdaq xnumx it was in bearish territory.

Such a spiral, observed in many markets, may continue until investors do not fully discount inflation, an increase in profitability, and expectations of interest rate increases.

Interestingly, in the US the latter started to fall at the beginning of the week as fears of a recession increased. Currently, based on the contracts on the federal funds rate, the market is assuming a peak of increases in mid-2023 at the level of 3,00-3,25%, while the estimates from the beginning of this month mentioned a peak of 3,5-.375%.

Today's reading of April's inflation in the US (at 14:30) seems important because if the price dynamics reaches its peak in this half of the year and starts to decline, the market may stop assuming very aggressive Fed actions. This could bring relief to the bond and equity markets, but also lead to the conclusion that the US dollar is close to reaching its cyclical high and may then depreciate.